Tariffs Power Point slides prepared by Andreea Chiritescu

Tariffs Power. Point slides prepared by: Andreea Chiritescu Eastern Illinois University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 1

The Tariff Concept • Tariff • A tax (duty) levied on a product when it crosses national boundaries • Import tariff • Tax levied on an imported product • Export tariff • Tax imposed on an exported product • Often used by developing nations • Raise revenue, increase the world price © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 2

The Tariff Concept • Protective tariff • To reduce the amount of imports entering a country • Insulating import‐competing producers from foreign competition • Allows an increase in the output of import‐ competing producers • Revenue tariff • To generate tax revenues • Placed on either exports or imports © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 3

TABLE 4. 1 Tariff revenues as a percentage of government revenues, 2007: selected countries Developing Countries The Bahamas Guinea Ethiopia Ghana Sierra Leone Madagascar Dominican Republic Jordan Percentage 51. 2 47. 9 33. 5 28. 5 27. 6 26. 9 20. 9 11. 3 Industrial Countries New Zealand Australia Japan Canada Switzerland United States United Kingdom Iceland Percentage 2. 6 2. 5 1. 2 1. 1 1. 0 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 4

Types of Tariffs • Specific tariff • Fixed amount of money per physical unit of the imported product • Relatively easy to apply and administer • Degree of protection it affords domestic producers varies inversely with changes in import prices • Provides domestic producers more protection during a business recession © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 5

Types of Tariffs • Ad valorem (of value) tariff • Fixed percentage of the value of the imported product • Distinguish among small differentials in product quality • Tends to maintain a constant degree of protection for domestic producers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 6

Types of Tariffs • Ad valorem (of value) tariff • Customs valuation problems • Estimations by customs appraisers • FOB vs. CIF valuation • Free‐on‐board valuation • Cost‐insurance‐freight valuation • Includes transportation costs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 7

Types of Tariffs • Compound tariff • Combination of specific and ad valorem tariffs • For manufactured products • Embodying raw materials that are subject to tariffs • Specific tariff • Neutralizes the cost disadvantage of domestic manufacturers ‐ from tariff protection granted to domestic suppliers of raw materials • Ad valorem tariff • Protects the finished‐goods industry © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 8

TABLE 4. 2 Selected U. S. tariffs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 9

TABLE 4. 3 Examples of tariffs, selected countries (in %) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 10

Effective Rate of Protection • Nominal tariff rate • Published in the country’s tariff schedule • Applies to the value of a finished product that is imported into a country • Effective tariff rate • Takes into account the nominal tariff rate • On a finished product • And any tariff rate applied to imported inputs • Used in producing the finished product © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 11

TABLE 4. 4 The effective rate of protection © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 12

Effective Rate of Protection • Effective tariff rate, e • e = The effective rate of protection • n = the nominal tariff rate on the final product • a = the ratio of the value of the imported input to the value of the finished product • b = the nominal tariff rate on the imported input © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 13

Effective Rate of Protection • If the tariff on the finished product • Exceeds the tariff on the imported input • Effective rate of protection exceeds the nominal tariff © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 14

Effective Rate of Protection • If the tariff on the finished product • Is less than the tariff on the imported input • Effective rate of protection is less than the nominal tariff • May even be negative • Protects domestic suppliers of raw materials more than domestic manufacturers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 15

TABLE 4. 5 China’s nominal and effective tariff rates in forestry products, 2001 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 16

Tariff Escalation • Tariff escalation • Raw materials are often imported at zero or low tariff rates • The nominal and effective protection increases at each stage of production • Processed goods • Higher import tariffs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 17

FIGURE 4. 1 Tariff escalation on industrial countries’ imports from developing countries Tariffs often rise significantly with the level of processing (tariff escalation) in many industrial countries. This is especially true for agricultural products. Tariff escalation in industrial countries has the potential of reducing demand for processed imports from developing countries, hampering diversification into higher‐value added exports. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 18

Outsourcing and Offshore‐Assembly Provision • Outsourcing • Certain aspects of a product’s manufacture are performed in more than one country • Improvements in cost competitiveness • Penetrate foreign markets • High tariffs or other trade barriers restrict the direct export of finished goods • Unique foreign production technologies, labor skills, raw materials, or specialized components © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 19

Outsourcing and Offshore‐Assembly Provision • Offshore‐assembly provision (OAP) • Favorable treatment to products assembled abroad from U. S. ‐manufactured components • Cost of the U. S. component ‐ not included in the dutiable value of the imported assembled article • Incentives foreign manufacturers to purchase components from U. S. sources • Generates sales and jobs in the U. S. component industries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 20

Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion • Tariff avoidance • Legal utilization of the tariff system to one’s own advantage • To reduce the amount of tariff that is payable by means that are within the law • Tariff evasion • Individuals or firms evade tariffs by illegal means © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 21

Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion • Ford Motor Company • Ships its Transit Connect five‐passenger wagons • From its factory in Turkey to Baltimore, MD • Wagons: 2. 5% tariff (duty of $625) • Stripped and converted into cargo vanns • Cargo vans tariff: 25% (duty of $6, 250) • Completely legal © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 22

Dodging Import Tariffs: Tariff Avoidance and Tariff Evasion • Smuggled steel evades U. S. tariff • Falsely reclassify steel as a duty‐free product • Detach markings which indicate that the steel came from a country subject to tariffs • Make it appear to have come from one that is exempt • Alter the chemical composition of a steel product enough so that it can be labeled duty‐ free © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 23

Postponing Import Tariffs • Bonded warehouse • Dutiable imports can be brought into the U. S. and temporarily left in a bonded warehouse, duty‐free • Imported goods ‐ stored, repacked, or further processed ‐ for up to five years • No customs duties are owed until the goods are withdrawn for domestic consumption © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 24

Postponing Import Tariffs • Foreign‐trade zone (FTZ) • An area within the U. S. • Business can operate without the responsibility of paying customs duties on imported products or materials • For as long as they remain within this area • And do not enter the U. S. marketplace • Customs duties are due when goods are transferred from the FTZ for U. S. consumption © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 25

Postponing Import Tariffs • Foreign‐trade zone (FTZ) • No time limit on how long goods can be stored • General‐purpose zones • Public facilities • Used by more than one firm • Subzones • A single firm’s site • Used for more extensive manufacturing or assembly © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 26

Tariff Effects: An Overview • Tariff effects • • Higher price of imports Lower demand for imports Domestic suppliers expand output Benefits • Domestic producers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 27

Tariff Effects: An Overview • Tariff ‐ imposes costs to domestic economy • Buyers will pay more for their protected U. S. ‐made goods than they would have for the imported goods under free trade • Jobs will be lost at retail and shipping companies that import foreign‐made goods • Jobs will be lost in any domestic industries that suffer from retaliatory tariffs • The extra cost of the goods gets passed on to whatever products and services that use these goods in the production process © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 28

Tariff Welfare Effects • Consumer surplus • The difference between the amount that buyers would be willing and able to pay for a good and the actual amount they do pay • Affected by the market price • A decrease in the market price • Increase in the quantity purchased • Larger consumer surplus • A higher market price • Reduce the amount purchased • Shrink the consumer surplus © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 29

Tariff Welfare Effects • Producer surplus • Revenue producers receive over and above the minimum amount required to induce them to supply a good • Affected by the market price • A higher market price • Increase in quantity supplied • Higher surplus • A lower market price • Lower surplus © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 30

FIGURE 4. 2 Consumer surplus and producer surplus Consumer surplus is the difference between the maximum amount buyers are willing to pay for a given quantity of a good and the amount actually paid. Graphically, consumer surplus is represented by the area under the demand curve and above the good’s market price. Producer surplus is the revenue producers receive over and above the minimum necessary for production. Graphically, producer surplus is the area above the supply curve and below the good’s market price. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 31

Tariff Welfare Effects: Small‐Nation Model • Small nation • Its imports ‐ a very small portion of the world market supply • Price taker • Tariff effects • Raises the home price of imports by the full amount of the duty • Higher domestic production • Lower domestic consumption © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 32

Tariff Welfare Effects: Small‐Nation Model • Small nation ‐ Tariff effects on nation’s welfare • Consumer surplus falls • Welfare effects of a tariff • • Revenue effect Redistribution effect Protective effect Consumption effect Additional tax revenue Benefits domestic producers Wastes resources Harms the domestic consumer © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 33

FIGURE 4. 3 Tariff trade and welfare effects: small nation model For a small nation, a tariff placed on an imported product is shifted totally to the domestic consumer via a higher product price. Consumer surplus falls as a result of the price increase. The small nation’s welfare decreases by an amount equal to the protective effect and consumption effect, the so‐called deadweight losses due to a tariff. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 34

Tariff Welfare Effects: Small‐Nation Model • Revenue effect • The government’s collections of duty • Number of imports times the tariff • Portion of the loss in consumer surplus • Transferred to the government • Does not result in an overall welfare loss © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 35

Tariff Welfare Effects: Small‐Nation Model • Redistribution effect • Transfer of the consumer surplus • To the domestic producers of the import‐ competing product • Transfer of income from consumers to producers • Does not result in an overall loss of welfare for the economy © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 36

Tariff Welfare Effects: Small‐Nation Model • Protective effect • Loss to the domestic economy • From wasted resources used to produce additional goods at increasing unit costs • Less efficient domestic production is substituted for more efficient foreign production • Loss of welfare © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 37

Tariff Welfare Effects: Small‐Nation Model • Consumption effect • Residual not accounted for elsewhere • Loss of welfare occurs • Increased price • Lower consumption • Deadweight loss of the tariff • Protective effect • Consumption effect © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 38

GLOBALIZATION Trade protectionism intensifies as global economy falls into recession • Global economic downturns ‐ catalyst for trade protectionism; 2007– 2009, • Decrease in the demand for goods and services • Decline in international trade • Credit crunch ‐ extra squeeze on trade • Shortfall of some $100 billion in trade finance – 90% of world trade © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 39

GLOBALIZATION Trade protectionism intensifies as global economy falls into recession • Indiscriminate decrease in trade • Exports declined by 30 % • China ‐ targeted by the most governments for protectionist measures • Russia • Increased tariffs on imported automobiles • India • Raised tariffs on steel imports • Argentina • New obstacles to imported auto parts and shoes © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 40

TABLE 4. 6 Creeping protectionism during global economic downturn of 2008– 2009: number of protectionist measures initiated* © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 41

GLOBALIZATION Trade protectionism intensifies as global economy falls into recession • United States, steel industry • Increased tariffs • $100 billion U. S. steel market • Not protected by the “Buy American ” legislation • Fiscal stimulus program • Shut out foreign companies from U. S. government contracts (25% of new steel orders in 2009) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 42

GLOBALIZATION Trade protectionism intensifies as global economy falls into recession • United States, tires • Tariffs of 25‐ 35% on imports from China • For the next three years • Priced out of the market 17% of all tires sold in the United States • Forced up the market price for consumers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 43

GLOBALIZATION Trade protectionism intensifies as global economy falls into recession • Once trade barriers are increased • Can severely damage global supply chains • It can take years of negotiation to dismantle trade barriers • It can take years before global supply chains can be restored © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 44

Tariff Welfare Effects: Large‐Nation Model • Large‐nation • An importing nation large enough • Changes in the quantity of its imports • By means of tariff policy • Influence the world price of the product • United States • Autos, steel, oil, and consumer electronics • Japan • European Union © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 45

Tariff Welfare Effects: Large‐Nation Model • United States ‐ tariff on automobile imports • Prices increase for American consumers • Decrease in the quantity demanded • If significant enough ‐ force Japanese firms to reduce the prices of their exports © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 46

TABLE 4. 7 Effects of increases in U. S. tariffs on the world price of imported goods © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 47

Tariff Welfare Effects: Large‐Nation Model • Economic effects of an import tariff • Redistributive effect • From domestic consumers to domestic producers • Deadweight loss • Consumption effect • Protective effect • Revenue effect • Domestic revenue effect • Terms‐of‐trade effect © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 48

FIGURE 4. 4 Tariff trade and welfare effects: large nation model For a large nation, a tariff on an imported product may be partially shifted to the domestic consumer via a higher product price and partially absorbed by the foreign exporter via a lower export price. The extent by which a tariff is absorbed by the foreign exporter constitutes a welfare gain for the home country. This gain offsets some (all) of the deadweight welfare losses due to the tariff’s consumption and protective ©effects. 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 49

Tariff Welfare Effects: Large‐Nation Model • In figure 4. 4 • If e > (b + d) • National welfare is increased • If e = (b + d) • National welfare remains constant • If e > (b + d) • National welfare is diminished © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 50

Tariff Welfare Effects: Large‐Nation Model • Optimum tariff • Maximize the positive difference between • Gain of improving terms of trade (area e) • Loss in economic efficiency from the protective effect (area b) • Consumption effect (area d) • Is only beneficial to the importing nation • Beggar‐thy‐neighbor policy, could invite retaliation © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 51

TRADE CONFLICTS Gains from eliminating import tariffs • If only United States removed tariffs and other restraints on imported products • • • Lowers the price of the affected imports Lower the price of the competing U. S. good Economic gains to the U. S. consumer Decrease the production costs Domestic profit reductions © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 52

TRADE CONFLICTS Gains from eliminating import tariffs • If only United States removed tariffs and other restraints on imported products • Displaced workers from the domestic industry that loses protection • U. S. government loses tax revenue • Estimated annual economic welfare gains from eliminating significant import restraints • Welfare gain of about $3. 7 billion to the U. S. economy © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 53

TABLE 4. 8 Economic welfare gains from liberalization of significant import restraints*, 2005 (millions of dollars) Annual change in Economic Welfare Import-Competing Industry Textiles and apparel Sugar Dairy Footwear Ethyl alcohol Beef Tuna Glass products Tobacco $1, 885 millions 811 573 249 120 48 24 20 19 *Import tariffs, tariff‐rate quotas, and import quotas © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 54

How a Tariff Burdens Exporters • Effects of import tariffs on exporters • Higher production costs – from imported inputs • Cannot pass it to the buyers • Higher prices • Reduced overseas sales • Raise the cost of living • Higher wages • Higher production costs • International repercussions • Lead to reductions in domestic exports © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 55

FIGURE 4. 5 How an import tariff burdens domestic exporters A tariff placed on imported steel increases the costs of a steel‐using manufacturer. This increase leads to a higher price charged by the manufacturer and a loss of international competitiveness. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 56

Steel Tariffs Buy Time for Troubled Industry • 2001, President Bush, import tariff program • Revitalize steel industry • American steel companies ‐ lack of competitiveness • Heavy burden on American steel‐using industries • Temporarily save roughly 6, 000 jobs • At a cost to U. S. consumers and steel‐using firms: $800, 000 ‐$1. 1 million per job © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 57

Steel Tariffs Buy Time for Troubled Industry • 2001, President Bush, import tariff program • Save 1 job in steel manufacturing – at a cost of 13 jobs in steel‐using industries • Increased production costs for a large number of U. S. companies that use steel • 2007, Government trade regulators • Revoke tariffs on high‐end steel imports from certain countries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 58

TABLE 4. 9 President Bush’s steel trade remedy program of 2002– 2003: selected products © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 59

Tariffs and the Poor • Tariffs are inequitable • Impose the most severe costs on low‐income families • Higher tariffs on cheap goods than luxuries • Affect different countries in different ways • Burdens countries that specialize in the cheapest goods • Very poor countries in Asia and the Middle East © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 60

TABLE 4. 10 U. S. tariffs are high on cheap goods, low on luxuries © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 61

Arguments for Trade Restrictions • Free‐trade argument • If each nation produces what it does best and permits trade • In the long term • Lower prices • Higher levels of output, income, and consumption © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 62

Arguments for Trade Restrictions • Job protection argument • Alleged job losses to foreign competition • Omits: dual nature of international trade • Trade restrictions on textiles and apparel, steel, and automobiles • Little or no positive effect on the level of employment in the long run © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 63

Arguments for Trade Restrictions • Job protection argument • Job gains for only a few industries • Job losses spread across many industries • Each job saved • Ends up costing domestic consumers more than the worker’s salary © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 64

Arguments for Trade Restrictions • Protection against cheap foreign labor • Low wages abroad make it difficult for U. S. producers to compete with producers using cheap foreign labor • Fails to recognize the links among efficiency, wages, and production costs • Low wages by themselves do not guarantee low production costs • Low‐wage nations ‐competitive advantage • Only in the production of goods requiring greater labor and little of the other factor inputs © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 65

TABLE 4. 11 Hourly compensation costs in U. S. dollars for production workers in manufacturing, 2007 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 66

TABLE 4. 12 Productivity, wages, and unit labor costs, relative to the U. S. : total manufacturing, 2002 (U. S. = 1. 0) © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 67

Arguments for Trade Restrictions • Fairness in trade • Foreign governments play by a different set of rules • Foreign firms unfair competitive advantages • Trade benefits the domestic economy even if foreign nations impose trade restrictions • Does not recognize the potential impact on global trade © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 68

Arguments for Trade Restrictions • Maintenance of the domestic standard of living • One nation imposes a tariff that improves its income and employment • At the expense of its trading partner’s living standard • Retaliatory tariffs • Lower level of welfare for all nations © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 69

Arguments for Trade Restrictions • Equalization of production costs • Scientific tariff ‐ to eliminate unfair competition from abroad • Problems • Different costs across business • Higher domestic prices • Benefit efficient domestic companies • Domestic consumer would be subsidizing inefficient production © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 70

Arguments for Trade Restrictions • Equalization of production costs • Approximates a prohibitive tariff • Completely contradicts the notion of comparative advantage • Wipes out the basis for trade and gains from trade © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 71

Arguments for Trade Restrictions • Infant‐industry argument • Trading nations should temporarily shield their newly developing industries from foreign competition • Once a protective tariff is imposed ‐ very difficult to remove • Special‐interest groups ‐ convince policy makers that further protection is justified © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 72

Arguments for Trade Restrictions • Infant‐industry argument • Very difficult to determine which industries will be capable of realizing comparative advantage potential • Not valid for mature, industrialized nations • There may be other ways of insulating a developing industry from cutthroat competition • Subsidize the industry © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 73

Arguments for Trade Restrictions • Noneconomic arguments • National security argument • Protect essential industries • What constitutes an essential industry • Cultural and sociological considerations • Arguments justifying tariffs • Based on the assumption that the national welfare, as well as the individual’s welfare, will be enhanced © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 74

TRADE CONFLICTS Petition of the candle makers • Frederic Bastiat, French Chamber of Deputies • Satire of protectionists’ arguments, 1845 • A law be passed requiring people to shut all windows, doors, and so forth • So that the candle industry would be protected from the “unfair” competition of the sun • Great benefit to the candle industry • Creating many new jobs and enriching suppliers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 75

Arguments for Trade Restrictions • Political economy of protectionism • Elected officials form policies to maximize votes and remain in office • Bias in the political system that favors protectionism • Protection‐biased sector • Import competing producers • Labor unions ‐ in that industry • Suppliers to the producers in the industry © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 76

Arguments for Trade Restrictions • Political economy of protectionism • Protection‐biased sector • Seekers of protectionism • Established firms in an aging industry ‐ lost their comparative advantage • Free‐trade‐biased sector • Exporting producers, their workers, and their suppliers © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 77

Arguments for Trade Restrictions • United States’ protection policy • Dominated by special‐interest groups that represent producers • Gains from protection – concentrated among well‐ organized producers and labor unions • Consumers • Not organized; Losses widely dispersed • Absorb individually a small & difficult‐to‐identify cost; • Uninformed © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 78

Arguments for Trade Restrictions • Supply of protectionism • By the domestic government • Depends on: • The costs to society • The political importance of import‐competing producers • Adjustment costs • Public sympathy © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 79

Arguments for Trade Restrictions • Demand of protectionism • By the domestic companies and workers • Depends on: • Comparative disadvantage • Import penetration • Concentration • Export dependence © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 80